Thursday, November 9, 2023

SECU - "Risk-Based Savings" ??? Why Risk It? ... Risk-based savings? 

Now what...

Lots of comments yesterday [link here to Nov. 8 post] in the continuing discussion of risk-based lending (RBL). A topic of equal importance for SECU members arose concerning the investment portfolio at SECU. The SECU investment portfolio is composed mainly of $10 billion in super-safe U.S. treasury securities - great strategy, no risk there! The concern is not about the high quality of the portfolio; the concern is about the "yield" on the portfolio.

The yield (the interest rate SECU earns) on those treasury investments  is currently @1%!  Most of these investments were made in prior years when rates were much lower.  We all know that market interest rates have soared over the last 2 years - just check out SECU's loan rates compared to 2 years ago! Yep, interest rates are way up everywhere!

So, SECU - like many other financial institutions - is temporarily caught in a blind alley. The $10 billion portfolio is earning just 1%, while market rates are now @ 5%. But here, take a look at how the comments developed (but you may want to read the whole dialogue for entertainment!):

"Can SECU dump those T-Bills without taking a major loss? Wasn't that part of the SVB downfall? Understand they had a liquidity concern and had to sell, but wouldn't want to see SECU make that mistake. Maybe they are waiting for those to mature before raising deposit rates? And with current treasury rates hovering around 4.5%-5.5% the used car rate would need to be at that or more to account for risk(which i'm all for, that will certainly bring in A paper). Lower rates for all brings in more "good" loans. Sounds like a good investment to me. I think the timing of those treasury maturities may play a bigger role here though."

"Yes, I think we all agree that there's no changing purchases that occurred in the past. SECU is in the red on that portfolio, regardless of the how the accounting is done (read: the loss has already been incurred). Seems like management doesn't want to further the decline in assets by realizing a loss on $9B in bonds. One has to wonder if there is no good alternative investment for these funds if they are marked as part of the capital reserves."

These were purchased under Mike Lord while the loan to deposit ratio was lower. They would have not been viewed as a bad investment at the time. Many other banks and credit unions are dealing with the same thing. SVB’s problem was that they had clients and businesses with large sums on deposit that pulled large sums out within a few days which caused SVB to have to sell treasury investments at a loss. We will be fine. This is one of the reasons why it is difficult to raise deposit rates right now.

😎 That  6:56 PM comment - "We will be fine" - is bothersome if it reflects the SECU Board and management view of the potential risk SECU may now confront. How so?

The description of what occurred earlier in the year at SVB (Silicon Valley Bank in California, one of the 50 largest U.S. banks) is accurate.  SVB had a mega-underwater investment portfolio.  For depositors, SVB rates became non-competitive. Folks pulled their funds out to pursue better rates elsewhere and the bank had to close. As deposits left,  SVB was forced to sell its underwater portfolio to fund withdrawals. SVB didn't end up having the option "to wait", even though they probably thought "We will be fine"!  A "We will be fine", "hope for the best" strategic plan doesn't usually work out all that well in the real world.

SECU has @ $18 billion in member deposits sitting in money market share accounts (MMSA) earning 1.1%. Hope for the best?

If the SECU Board could take that potential risk off the table today, shouldn't they? Wouldn't you as a member-owner?

... can the Board do that? (Yup, easily!)